A Kentucky pension relief bill signed into law July 24 by Gov. Matt Bevin could bring lasting implications for retirees in the state, including further erosion of the funded status of one of the plans within the Kentucky Retirement Systems, as well as setting a concerning precedent for public employers wanting to exit the $18 billion system, sources say.
House Bill 1 forces quasi-governmental agencies to leave the $2 billion Kentucky Employees Retirement System for Non-Hazardous employees if they are unable or unwilling to pay rising pension contribution costs, which are currently frozen at 49% of payroll for those agencies due to HB 1, but would otherwise be at 83% currently.
The new law allows 118 quasi-governmental agencies, such as local health departments, domestic violence shelters, rape crisis centers, child advocacy centers, and other state-supported universities and community colleges, some of which are struggling to remain open, to leave the KERS non-hazardous plan.
KERS non-hazardous, which was 12.9% funded with 122,788 members as of June 30, 2018, its most recent annual financial report shows, is part of the Kentucky Retirement Systems.
Agencies that leave the pension plan to avoid a spike in the employer contribution rate next year, will have to offer public employees a defined contribution plan. Employers must choose whether they will exit the non-hazardous plan during a window that starts April 1, 2020, and ends April 30, 2020.
The effective cessation date for employers is June 30, 2020, at which point agencies leaving the plan could choose a "hard freeze" of employee benefits, meaning no future employees hired after the date will earn benefits in KERS, while employees hired before the date become inactive members in KERS as of the end of June, an actuarial analysis of the legislation said.
Employers could also elect to do a "soft freeze," which would mean no future employees hired after June 30, 2020, will earn benefits in KERS; employees hired since Jan. 1, 2014, will become inactive members of the pension plan as of June 30, 2020; and those hired before 2014 will continue to be active members and earn KERS benefits while employed with the agency after the cessation date, the analysis said.
Under a hard or soft freeze, employers will pay actuarial costs to cover their share of unfunded liabilities in a lump sum or in installments over 30 years.
While the bill was signed into law, opponents of the legislation expect it will face a battle in court.
Following the July 24 Senate vote, Kentucky Government Retirees, an advocacy group representing 15,000 Kentucky Retirement Systems retirees and active employees, said in a statement that it was "bitterly disappointed" in the passage of a bill "that assaults the contract rights of dedicated public employees."